Look to Fertilizer for a Profitable Summer

by Bryan Perry | May 3, 2013 7:00 am

It’s the start of spring planting season, so my mind is turning to a pair of corn-fertilizer stocks that have been under selling pressure for the past few months.

Because fertilizer makers are tied to the corn market, the prices tend to rise (and fall) together. Farmers who are left with cornfields ravaged by scorching heat or extreme cold will need to replant a substantial amount of acreage so they can replenish their inventories to meet global demand at a reasonable price. That’s where the fertilizer comes in.

Depending on the weather — and that’s a mouthful in itself — both Rentech Nitrogen Partners LP (NYSE:RNF[1]) and CVR Partners LP (NYSE:UAN[2]) are poised to become more attractive holdings in the weeks ahead. UAN is going to resume its full payout following plant maintenance, and RNF just provided a fairly robust outlook for future distribution to unitholders.

Last week, RNFreported that it expects recent financing efforts to allow for increased distributions beginning in 2014. The company noted that a recently completed offering of more than $300 million in 6.5% second-lien senior secured notes will be able to finance upcoming expansion and maintenance projects, as well as future cash distributions. Also, the company repaid all its outstanding principal on 2012 loans and related interest-rate swaps.

While RNF does not expect any impact on its guidance for cash distributions of $2.60 per unit in 2013 (for a yield of roughly 7%), lower debt service required by the notes would increase cash available for distribution in the future. The company predicts the distribution could increase by approximately $1.75 per unit cumulatively between 2014 and 2017.

This is the kind of news investors can hook on to.

CVR Partners, a Delaware limited partnership that focuses primarily on manufacturing nitrogen fertilizers, is the only operation in North America that uses the process of petroleum coke gasification to produce its fertilizer. In 2012 alone, the company produced 124,600 tons of ammonium for sale and 643,800 tons of urea ammonium nitrate (UAN). It produces about 5% of total UAN fertilizer in the United States and is the lowest-cost producer of nitrogen fertilizer in this country — and arguably the world. Recently, the company announced it will pay a record distribution of 61 cents per common unit in May, bringing its trailing yield (calculated from the upcoming 61-cent payment and its previous three distributions) to about 7%.

Both UAN and RNF go ex-dividend on May 6 with a payout date scheduled for May 15.

I expect more great things for UAN and RNF in the future as the farming community undertakes the lengthy task of replenishing the corn supply going into the summer months.

Bryan Perry is editor of Cash Machine[3], a newsletter focused on dividends and income investing. As of this writing, he did not own a position in any of the aforementioned securities.